i thought gyda=with, so is the literal tranlation "what is better with you?"
Yes. The pattern ... well gyda... here is specific to 'prefer'.
licio/hoffi'n well = 'liking better'
The question here is Te?. Since there is no verb for te to come before or after, it is treated as an emphatic sentence and so the yes/no answers are Ie or Nage.
In practice, we are more likely to answer with the equivalent of something like 'Tea would be great, thank you.' Byddai te'n wych, diolch